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A tax credit enacted to encourage small businesses and tax-exempt
organizations to provide health insurance coverage for employees is
too complicated and is not meeting its goal, witnesses told a
congressional panel Tuesday.

The credit, passed as part of the Patient Protection and Affordable
Care Act, P.L. 111-148, in 2010, was estimated by the Congressional
Budget Office to cost $37 billion over 10 years and apply to
approximately 4 million businesses and tax-exempt organizations. As of
mid-October, only 309,000 taxpayers had claimed the credit, totaling
$416 million versus the $2 billion anticipated for the tax year. To
receive the credit, which offsets up to 35% of the employer’s health
insurance premium costs, an employer must have 25 or fewer
full-time-equivalent employees who earn average wages of $50,000 or
less. The credit increases to 50% of the premium costs in 2013.

The credit is so complex that small employers “are perplexed about
how the tax law applies to them,” and they cannot quickly or easily
evaluate whether they are eligible for the credit, Patricia Thompson,
chair of the AICPA’s Tax Executive Committee, told the House Ways and
Means Oversight Subcommittee.

“It was not uncommon this year for tax preparers to have spent up to
20% of the time necessary to prepare an entire small business return
just on the credit calculation, only to learn that the client did not
qualify for the credit,” Thompson testified.

She and other witnesses credited the IRS for its outreach to
taxpayers to educate them about the credit and provide guidance—the
Treasury Inspector General for Tax Administration gave the agency a B
or B+. However, the existence of other incentives creates “white
noise,” said Todd McCracken, president of the National Small Business
Association, making it difficult to get business owners’ attention.

Some of the committee Democrats defended the credit, saying it was
too early to say the credit is not working, and they pointed to
proposed cuts to the IRS’ budget as part of the problem. Committee
member Jim McDermott, D-Wash., questioned whether the credit was in
fact difficult, as one of the witnesses said he did not have a problem
with it.

Thompson said that the challenge is less for tax preparers than it
is for the small business owner, whose task of gathering and analyzing
the information is “more than taking one number and putting it
somewhere else.” One of the challenges is determining whether seasonal
workers’ hours can be counted toward the credit because they are
treated differently under the law than other
workers.

Based on CPAs’ experience with the credit,
Thompson made the following recommendations, among others, to improve
the tax credit:

Change the definition of a small business so it is based on
either gross receipts or the employee count from the prior year or
the average of the prior two years. Alternatively, increase the
count number of full-time-equivalent employees. The current
definitions used to determine eligibility for the credit are not
straightforward or consistent with other provisions of the Internal
Revenue Code.

Eliminate the phaseout calculations for the employee count and the
annual salary. The phaseouts make the credit difficult to apply and
require numerous calculations before determining the amount of
credit available.